The Federal Reserve reported Friday the total amount of consumer credit had increased $26.85 billion to a total of $3.18 trillion, a rate much higher than most analysts had predicted. It was also a large increase from the $19.5 billion increase recorded in March. Those numbers indicate consumer debt is now increasing at a 10.2% annual rate. This is the fastest growth in consumer debt since July 2011. Most of this came from non-revolving credit, the type which includes auto and student loans, which increased by $18 billion in April.
The numbers were even worse when it came to credit card debt. The Federal Reserve reported revolving credit, the type which measures the use of credit cards by consumers, increased by nearly $9 billion ($8.8 billion). This means that credit card debt is now running at a 12.3% annual rate gain, a number not seen since just after the September 11, 2001 terrorist attacks when consumers were being urged to spend more in an attempt to help improve the economy.
The fundamental personal finance principle for credit card use is to never actually borrow money on the cards. That is, any purchases placed on a credit card should be paid off in full when the bill comes so that you don’t end up paying the double digit interest rates which come with credit card loans. While consumers racking up credit card debt might help the economy short-term, it hurts it long-term, as those consumers must pay money as interest to credit card companies rather than spending the money to buy other goods.
For those who do have any type of consumer credit card debt, the best course of action they can take is to begin to pay it off as soon as possible. One of the best ways to do this is to set up a debt snowball to begin paying it off. In addition, it’s important to put in place a strategy to build an emergency fund so they can avoid further credit card debt in the future.
The increased willingness of consumers to borrow on credit cards shows many still fail to understand the high cost of making purchases with borrowed money. Interest rates can significantly increase the cost of any product or service which is purchased on a credit card, and not paid off in full at the end of the month. Credit card debt also makes it difficult for most people to reach their long-term financial goals as they are forced to pay off the debt rather than invest the money toward their future financial goals.
Until becoming debt free becomes a priority for Americans, rather than buying things they don’t currently have the money for, there will continue to be a personal finance crisis in this country. As the latest data shows, it doesn’t seem becoming debt free is a priority for many.
(Photo courtesy of Sean MacEntee)